It is a known fact that the rate of start-ups failing within the first few years of incorporation is quite high. One of the most common reasons for such failure is that the companies have limited funds as working capital to realise their business plans, run their business activities or expand sufficiently — which is why it is important for you as an entrepreneur to ensure the planning of a sound financial strategy for your company, even as you are drafting up your business plan pre-incorporation. Even recently, Forbes reported on data that showed strong consistency in failure rates across start-ups founded over the years from 1994 and 2001.
There are several ways of ensuring that your start-up does not suffer the same fate as many other spectacular blowouts in the corporate landscape of hopes and dreams, just because you have limited access to capital. The following are sources of funding options for Singapore start-ups that may propel the business to greater heights.
The landscape for the Singapore private equity funding scene is getting more robust these days, because the government actively encourages private investors to invest in the country’s start-ups with numerous tax incentives, making Singapore one of the top most attractive markets for private equity and venture capital activities. If you opt to finance your business by selling equity in your start-up company, you sell partial ownership of your company (in the form of shares) for a cash investment.
Why would anyone give you money for your company that has no track record, no concrete guarantees of profitability, you may ask. Usually, this is because the investor is your family member, friend or simply someone who believes that your business has great potential. If your investor is in the latter category, this means that typically this investor would get a substantial financial return on their investment if your company subsequently succeeds as they (and you) think it would.
What such equity financing means to you as an entrepreneur is this: what you pay to your investors in the form of dividends on shares is typically comparably lower than interest rates you would pay to service a bank loan (called debt financing). Thus, depending on the situation, equity financing may sometimes be more expensive for you if your company turns out to be overwhelmingly successful— because if your company earns high profits, you will be paying out a total amount of dividends on these investments that are a greater value than the interest amounts you would pay on a fixed bank loan (that is independent of how much profit your business makes); however, if the company does not make profits then equity financing becomes less of a financial liability upon the company given that you are not obliged to pay your investors if there are no profits (versus having to still pay the bank back for the loan you took). In some ways, equity fundraising is preferable because the investors bear such investment risks if the company makes losses or fails i.e. the investors will then lose the money that they invested in that company.
Finally, private equity funding is an attractive source of start-up funding especially for companies that lack the burdensome collateral or credit-worthiness to leverage on, for taking large loans for purposes of working capital. However, it is crucial for you to understand that in order to have a good chance of securing equity capital in Singapore, you need to show your potential investors that you have a watertight and comprehensive business plan, clear exit strategies, reasonable and prudent financial projections, an experienced and go-getting management team, as well as strong growth potential.
Otherwise, you will have to seek other sources of funding like from venture capitalists, business angel investors, banks, investment companies/funds or financial institutions.
Angel investors are private investors who typically not only invest capital but also contribute their business expertise/skills in early-stage businesses in exchange for a significant share in the company. They can be individuals, or be part of an angel network that engage in investing in businesses with high growth potential and in the industries that they are familiar with. That said, there are some business angels playing active roles in the business while others act as sleeping partners.
Angel investors are typically wealthy HNWIs or successful businessmen with an appetite for start-up companies with higher risk (but that are promising enough to yield higher returns), therefore your start-up should have a high growth potential, in order to win the favour of business angels. The quantum that individual business angels invest in can be sums of anywhere between S$25K to S$100K, while angel groups invest much larger sums in the range of S$250K to S$750K, and it has been shown that business angels in Singapore tend to invest in the business services, retail and hospitality sectors.
There are networks for you to refer to in seeking a business angel investor(s), for instance the Business Angel Network Southeast Asia (BANSEA), that match start-ups in the seed stage of enterprise formation with business angels. BANSEA invests in companies that offer exceptional opportunities for high returns on investment, which usually involves early-stage ventures with a high growth potential, either in a developing market (especially in emerging markets) or in an existing market with international expansion capabilities, and that is sustainable in the long-run.
Private funds like banks, financial institutions, and investment companies are yet more options for entrepreneurs to consider when seeking financing for their businesses. These sources of funding are very rarely involved in an active role in managing the business (thus, giving you the autonomy of conducting your own affairs in the manner you deem best) as their main purpose is to receive an attractive return (usually in the form of high interest from 7-12%) on their investment. Thus, businesses that are already established, have a good credit track record, are already generating revenue in high amounts, and have a high growth potential would benefit from such sources, and not start-ups in early-stage growth. In Singapore, however, there are micro loan programmes instituted by the Singapore government under the auspices of Spring Singapore and IE Singapore that facilitate your taking of small loans from participating financial institutions like UOB, OCBC, DBS, Standard Chartered banks.
Venture capitalists are professional investors who have a more hands-on role in your business if they were to invest in your company, and they typically do so with the vested interests of their own clients’ profitability. Venture capitalists offer not only funding but also advice on increasing your business profitability, and possibly in operational matters as well, especially if your business requires input from different areas of expertise in the team. However, take note that venture capitalists typically are involved in their investments for between 2 to 5 years and seek a higher rate of return from the companies they invest in, at the rate of above 25% ostensibly because they will have to account for a higher level of profits to their clients. Popular start-ups for venture capital funds are those in high growth potential sectors such as IT, biotechnology and nanotechnology with a competitive edge in the market and longevity of profiteering. Start-ups whose business involve scientific breakthroughs, Intellectual Property creation and other similar large-scale impact businesses are often favoured by these venture capitalists.
The venture capital industry in Singapore is relatively new and small compared to the US and Europe, nevertheless, there are actually more than 100 venture capital firms in Singapore ranging from independent limited partnership venture capital firms to corporate-backed venture capital firms. Additionally, it is also common for Singapore government bodies, large corporations and high net worth individuals to set up venture capital funds in Singapore due to the attractive tax incentives and other beneficial government policies.
|Venture Capitalist and Business Angels||Private Financial Institutions|